Good day and welcome to the FY 2018 Q1 Interim Management Statement Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mike Powell, Group CFO. Please go ahead, sir.
Good morning, everyone. Thank you, [Kira]. Thank you for joining us this morning, welcome to the Ferguson conference call for our 2018 Q1 results. I'm joined here with Mark Fearon, our head of IR, as you know, and Nick Hopkins, that most of you will also know. Just to note, it's obviously our first set of results in U.S. dollars, given that the majority of our profits are now in U.S. dollars. Clearly, hopefully, that hasn't caused you too much disturbance updating your models. Hopefully, most of you have managed to do that now. Overall, I think first up, it's worth saying, I'm really pleased with our performance in Q1. It's certainly in line with where we expected us to be, and certainly sets us up well for the rest of the year, with good momentum going forward.
Let me firstly start with some highlights for the quarter, then obviously we'll open up for questions. Revenue growth for the group was good. We had organic growth up 7.6% in the quarter. Acquisitions adding close to nearly another couple of percent, bringing the total growth at constant currency to 9.3%. Gross margin performance was good. We continue to make some incremental improvements there, and that moved up some 20 basis points in the period. We controlled our operating costs well. All that means, that leads down to trading profit coming in at $394 million. That's 13% ahead of last year at constant exchange rates. On debt, importantly, at the end of the quarter, that was also in line with expectations, $790 million. That was after completing nearly GBP 100 million of the GBP 500 million buyback that we announced at the full year results.
I guess sat here today, we've probably done about GBP 185 million-GBP 190 million of that. Nearly double that amount as I sit here today. There's no change to our position on acquisitions since we last spoke to you guys in early October with the full year results. That does mean we have completed five acquisitions in the quarter, all in August and September, two in the U.S., and three in Canada and Central Europe, for a total consideration of $109 million. The pipeline still remains reasonable on M&A. We also announced during the quarter the agreement to sell Stark, the Nordics building materials business, for $1.025 billion before cost. We have retained a small number of surplus property, which value at around EUR 150 million, we'd expect to sell those properties, and exit those properties in due course.
The transaction for the Nordics disposal is conditional on receiving merger clearance from the relevant competition authorities. We'd still expect to close that deal in early 2018. Clearly, once I've got the money in the bank, as I said at the year-end, we'll go through our normal process, normal course of events, and we'll update the market on the group's asset allocation plan in due course, including any utilization of any excess cash. Let me jump into the operations just in a little bit more detail, having given you the group position. Starting with the U.S. The U.S. we generated good, strong organic revenue growth in the quarter. That was up 8.3%. That includes price inflation of about 1%, and then acquisitions contributed a further 2%.
We did see a small level of disruption at the beginning of the quarter from the hurricanes, as we said on the year-end call. In total, across the quarter, there was no material impact, and I don't expect any impact going forward either. That organic growth was generated widespread geographically across the U.S., and also across all of our business groups. Good growth geographically and across the business sectors. Sales grew well in all of the end markets. We have residential and commercial markets about 8%-9% ahead. Civil and infrastructure did well, just up over about 10%, and industrial growing at about three. U.S. gross margins improved, costs controlled well, and trading profit coming in in the U.S. at $363 million. That's $45 million ahead year-on-year. Turning to the U.K. U.K. was up 3.2%, principally as a result of increased selling prices.
However, the U.K. RMI market remains weak during the quarter. The economic backdrop, as you will all know, remains challenging. Gross margins were lower in the U.K. business in competitive markets as customers resisted supplier price increases. Trading profit was a touchdown at $21 million, $1 million lower than last year's $22 million. Therefore, our main focus on the U.K. continues to be the execution of our transformation plan. This remains on track, though it is fair to say we are becoming increasingly focused on accelerating the pace of execution to lower the cost base of that business. In Canada and Central Europe, that business grew well. Good organic growth, 7.7%, margins ahead, costs controlled well, and trading profit of $24 million, some $5 million ahead of last year.
I'm also pleased to say, we're set here early December, that since the end of the quarter reporting period, revenue growth has been broadly in line with the first quarter. In summary, we're pleased with the growth rate at the moment, particularly in the U.S. Before we all get too carried away, do remember it's the end of the first quarter only, and we do have much tougher comps to come, particularly in Q3 and Q4. Therefore, from the notes that I've seen this morning, most people look as though they're holding their numbers. Therefore, certainly at the moment, we're not expecting much change to analyst consensus. I think that's the overview from ourselves. Ciara, if I can hand back to you and look forward to taking the first question.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal. We will now take our first question from Robert Barry from Susquehanna. Please go ahead. Your line is open.
Hey, guys. Good morning. Can you hear me okay?
Morning, Robert.
Morning, Robert.
You're loud and clear.
It really is good morning for you. It's 2:00 A.M. in your neck of the woods, so thanks for coming on.
Exactly. Exactly. Given we're now in US dollars and the name has changed, I would not object to the call moving to 8:00 A.M. in a U.S. time zone, but we can take that offline.
We'll bear that in mind, Robert. Thank you.
Just a few things here. One, on the gross margin, nice to see that up 20 basis points. Just curious if you could unpack some of the drivers there and in particular to the extent pricing is contributing. On the conversion rate you saw in the U.S. business, curious if that's what you'd expect it to track at this kind of a low double-digit rate for the rest of the year. Maybe just thirdly on tax, a big topic now in the U.S. clearly. Just curious based on what we've seen so far, how we should be thinking about that. I assume a lower corporate rate would help, but any potential offsets you've heard being in the proposals that investors should have top of mind? Thank you.
Robert, thanks. Thanks for your questions. It's either been a late night or an early morning for you, I'm not sure. Gross margin, I think we've roughly covered it in the release. The organic growth rate for the group had about 1%-1.5% price increases in it. That's sort of 1% in the U.S. and a bit more elsewhere. The rest obviously is therefore volume growth. The flow-through or the conversion, I think, you called it, we tend to call it flow-through, but just to make sure we're talking the same language. The incremental profit from the incremental revenue. Again, if you do the math in the U.S., it was over 10%. I have guided at the full year results that I thought the flow-through would be around 9% this year. We are experiencing some headwinds on labor inflation in the U.S. of about 3.5%-4%.
That hasn't changed since we spoke. I think long term in good markets, we would still expect low double digits. We have guided this year to 9. There's no reason today for me to change that guidance. It was a good Q1, but just to scale it, the difference between the 9% drop-through and a 12% drop-through is only something like $8 million or $10 million on a cost base annually that's over $4 billion. You can get lost in the percentages if we're not careful. Again, I'm always very keen to say we don't run the business quarter by quarter. Flow-through is certainly good. I would still stick to my guidance for the full year of around the 9%. Clearly, if that changes at the half year, I'd clearly update the market, but no need to change that at the moment.
Tax, I'm glad somebody brought tax up straight away. Tax. Again, the legislative change has been all over the press. Clearly, No, no, not at all. It is one we continue to watch as we should. Clearly, the House and the Senate have run and passed their own programs. The two paths need to come together and be debated and then become legislation. Clearly, when that happens, we'll look at it. There are pages and pages of amended legislation from both Houses. The two main drivers for us, as you rightly picked up, Robert, one is the reduction in the headline corporate tax rate, and both Houses look at around 20% for that. The other big one for us is interest deductibility into the U.S. or out of the U.S. The two Houses have differing views on that.
They both disallow it to a large extent but for varying degrees. How those two levers interplay with each other matters to us. Of course, as with all legislation, it isn't often the two headlines that matter, it's what's caught in the detail of the legislation that can often either have unintended consequences that just need working through. There's no change to our tax guidance for this year. We'll continue to look at it. Clearly, if the corporate tax rate comes down and has a bigger effect than the interest deductibility lever, that would be a small gain for Ferguson as a whole. We'll continue to keep abreast of it and continue to update the market as this stuff gets put into legislation, which will be in the next month or two. Robert, does that answer your question?
Yes. Thank you.
Yes. Perfect.
Thank you.
Thank you.
Thanks.
Okay.
Thank you. Our next question comes from Sophie Szu-Yin Ku from AXA BNP Paribas. Please go ahead. Your line is open.
Hi, thank you for taking my question. I have two questions. The first one is, you mentioned during the call a reasonable acquisition pipeline. If you could maybe specify which areas of growth you are seeing. My second question is on how much extra OpEx is going into the U.S. business, and what is it going to be spent on?
Yeah, thanks, Sophie. Reasonable acquisition pipeline. We always struggle with how to describe this because you guys always play on whether it's reasonable or good or There's no difference in our pipeline today than there was two months ago. There's certainly no change in our approach to it. The fact that we did five in the first two months of the year and none in the last two months doesn't mean anything. Acquisitions do become along lumpy and bumpy. We continue to look, as we said at the year-end, in a number of areas, they all have to be core. The main focus is going to be deploying our capital in North America. Though, as you've already heard me say this morning, we actually did three in Canada and Central Europe, one of which was actually in Holland.
Where we own businesses, we will deploy capital where we see there is value creation to be had. The one in Holland was quite small as it happens, I think where we own assets, we will deploy capital, whether that be in organic or in M&A. I think no change. We'll continue to look at various platforms that help us as well as traditional bricks and mortar, if you like. In terms of the OpEx, the OpEx generally will grow as the business grows. Again, we look at fleet. We have some increases in marketing, and I've touched that we already have some increases in labor. Nothing really to pull out specific in terms of OpEx in any of our businesses, really.
There's a fair amount going in, obviously, to technology as well.
Sure
Sophie, we are still rolling out reasonably selectively the MDCs, which are these ship hubs that we've talked about. Probably the other area.
Thank you.
Thank you. Our next question comes from Rajesh Kumar from HSBC. Please go ahead. Your line is open.
Hi. Good morning. Thanks for giving the color on wage inflation and the price increases. Just picking through the numbers, you are implying that the second half flow through rate will come down to 9%. Isn't the wage inflation you are seeing broadly consistent with what your peers are? Don't you think the price increases can be a bit more stronger in the second half of the year?
Yeah. Wage inflation, it's in line with the peer. We clearly operate in competitive markets in all of our territories. I think the importance for us around price, it's not just a price issue, it's around service. I think John talked quite a lot at the year-end, we continue to work with our customers to make sure that they are getting the right service and the right products at the right cost. We often use the example where if a customer doesn't want a salesperson, that's fine. We won't offer them a salesperson. I think it's around the right pricing for the right customer with the right portfolio of goods rather than actually a direct link between wage inflation and just price. I wish it was actually that straightforward. It clearly isn't.
Therefore, our portfolio of offerings and the different channels that we offer to our customers, with the appropriate service, is really where we focus our efforts, Rajesh. Clearly on the wage inflation, our associates are critically important to us. We have a significant number of associates that provide that service to the customer, we're very proud of how they operate. I think being competitive in a competitive market remains important to us on the associate side as well.
That's very useful to understand. Thank you very much. Just on the when you say 1%-1.5% different price increase, I'm assuming when you're growing faster in civil infrastructure, which is contracted, that mix should be bringing the average price increase down? Or is it?
Sorry, I'm not.
Adjusted price?
Sure. Perfect. Great.
I'm just trying to understand if that price number is mix adjusted or is it a headline price number?
It's across the whole portfolio. It's across the whole portfolio of all of our businesses across all of our territories. Clearly, must by definition apply to the shorter term nature of our business, because a number of customers have fixed prices. As I said, in the U.K., prices, if you look at just price inflation going out, the U.K. is higher than the U.S. or Canada and Central Europe. Of course, the other side of that equation is supplier cost increases too. You have to be slightly careful just looking at revenue inflation. The question was, what was revenue inflation for the group? The answer is about one to one and a half.
That's very useful. Thank you. Just last one, I promise. The supplier rebates, if you're getting 8% type volume growth, do you think the accrual pace of the supplier rebate for the year is likely to change if the volume rate continues, or do you assume the volume growth rate to slow down through the year?
No. Well, there's no sort of effect within quarters of rebates. I'm not sure if that was your question. We continue to work with suppliers. We have a number of rebate schemes. Some are per piece, some are tiered to volumes. No, I wouldn't expect any material change in rebates. Again, our supplier relationships remain very, very important to us. This is a good opportunity for our suppliers to increase with us, as has always been the case, particularly in the U.S.A. Ferguson U.S.A. and suppliers at U.S.A., if I can call them that, have all grown up together very successfully and we look forward to continuing to do that with our suppliers there. To answer your question, nothing material to change on supplier rebates.
Thank you very much.
Thanks, Rajesh.
Thank you. Our next question comes from Aynsley Lammin from Canaccord. Please go ahead. Your line is open.
Hi. Thanks. Morning. Just two questions from me. Firstly, on the U.S. commercial side, I think you comment that you're seeing reasonable growth there. Just want to look at some of the kind of government macro statistics, it does suggest that area has slowed over recent months. Just wondered if you could give a bit more color on how you see the commercial, particularly the kind of sub segments within it and what the outlook is there. Secondly, just on the U.K., obviously gross margin's down. You're talking about a bit more price competition. Is that reflective of kind of the competitors changing strategy or emphasis maybe on pricing, and what would you need pricing to be in calendar 2018 to recover your expected cost increases? Thanks.
Aynsley, thanks. You are absolutely right. In commercial, I guess the public stats, government stats, if you just take commercial as a whole, are certainly weakening, though again, just in terms of the data, they are still growing. They're growing from a very good base. They're just up against much more difficult comps. Certainly on the slides that we tend to show at the half year and the full year, if I look at commercial market, I think at half year 2017, so nearly a year ago, we were showing that market growing 6%-7%. At the full year, you will have heard me say it was 5%-6%, and today you're hearing me say 3%. Those are still good growth numbers. Certainly for those Brits on the call, 3% still feels pretty good. Those are markets we can make good money in.
Whilst they are certainly slowing, which you have rightly picked up, Aynsley, I think when you break the data down, and we tend to look at the Put in Place data, if you look at the non-residential, it does depend on where you play. Power is a large negative. Some of the manufacturing is a large negative. Some of the other sectors are still growing quite nicely. If you look at lodgings, offices, educational areas where we play, they are still growing somewhat higher than the 3%. Hence, you see our performance doing quite nicely in commercial. Hopefully that explains what could be that perceived disconnect between the publicly available data and how we're performing. I think we continue to perform well in that sector and outperform the data. The danger with the data is it does include a whole load of sectors.
Your question on the U.K. on gross margins. Listen, we are disappointed with the U.K. We are sat in a space where we are getting supplier cost increases. Whilst we are putting some price increases through to our customers, we are clearly not recovering the supplier cost increases. I think in terms of the competitive landscape, it hasn't changed, frankly. The markets remain flattish, a little bit soggy, nothing for us to cry about. We better get on and operate in the markets that exist against the competition that exists. There is no reason to change our strategy. I think what you did hear me say, and I'll repeat it, is that, in the U.K., we laid out a strategy, Mark, probably a year ago.
Yes. September last year.
September last year, of reducing our bricks and mortar, reducing our number of branches, and reducing our employees. We said about 800 employees, and about nearly 90 branches, 80 branches. We have probably done about 25% of the employee reduction and about 30% of the branch closures. We also said we look at sharpening our supply chain and revitalizing our product range to make sure we have the right offering to our customer at the right place, in the right way, through the right channel. I think what you will see us continue to do, is be impatient with that restructuring. We need to get on with increasing the pace, execution, and delivery of those savings, against the background that I've described on margin. I think you'll see us continue to accelerate that program. No change to strategy. It's a good program.
We have a good business in the U.K. We frankly need to right-size the cost base, which we have already announced, but we sort of need to get on with it, and become impatient with ourselves. Does that help, Aynsley?
Yeah, that's very helpful. Just one last one. As you're looking into calendar 2018, the cost inflation you'd expect, would it be similar to kind of 3% or 4% you've seen this year? Any big changes to that in the U.K.?
In which business?
In the U.K.
Just the kind of supply cost influence.
Yes. Probably not a bad number. Yes, it's probably about right.
Great. That's really helpful. Thank you very much.
Thanks, Aynsley Lammin.
Thank you. Our next question comes from Gregor Kuglitsch from UBS. Please go ahead.
Hi. Good morning, guys. There are a few questions. The first one is just on the quarterly growth. I want to understand, I think when you, September or beginning of October, you said you were running around six, now it's 7.6. I guess the question is, did you have an extremely strong October, or was the six kind of around the down number? Actually, there wasn't perhaps that arithmetic doesn't quite hold. The second question is on capital return and preferences from here. I understand you haven't communicated, on the sale of the Nordics. Given the quantum, is there a choice to be made between special dividend and a buyback? Are you essentially agnostic between the two? I know in the past both have been done. I'm not quite sure based on what criteria.
Can you just question the tax bill, you said is a small positive. When you say a small positive, are you saying that you think overall it'll be quite marginal? I guess I want to understand what is the definition of small. Your current tax was around 28%. Would say, I don't know, 400, 500 basis points still fall in the category of small? Would you say that's already material? Thank you.
Thanks, Gregor. Your question on growth was, the math doesn't work if you plug in 6% at the end of September. You're dead right, it doesn't. Yes, September was a bit better. October was a good month. You're right, the September 6 was probably a lower than the actual outturn. November, as I've said, for the group, is pretty much in line with Q1. That's why we're sort of comfortable as we look forward. In terms of capital return, I think your question was, what's the choice? I'm going to be really boring here. I'd like to get the cash in the bank first. We have not closed this deal. I'm not flagging that we're worried about it either, so don't take that out. We need to get the clearance. We need to close the deal.
We need to hand over the business properly and professionally. Up until then, we're in charge of this business, and it needs to continue to trade very well, which it currently continues to do. Once we've got that money in, we'll go through the 4 buckets that I talked about very deliberately at year-end, in order, the choices that we always face, not just because we've got some extra money in the bank as and when it lands, is organic growth, it's progressive dividends in line with long-term earnings. It's M&A. Bucket 4, as I call it, is if we've got any left, we'll clearly get it back to shareholders on a reasonably prompt basis. It's only when we get there will we then make that choice.
If we actually end up in bucket 4, we'll then decide how to get it back, to generate value for the shareholder. We'll go through that process in our normal course of business, and have that discussion with the board, as and when we get the deal closed. The team are very focused, with the buyer, on making sure we get this deal closed, and the money in the bank so that I get happier. On tax, thanks for asking the question of clarification because I wouldn't want any misalignment. I'm trying to say that neither option as presented today are negative. 4% to 5% is big in the tax world. Just to give you an idea, the 20% corporate tax headline, which everybody grabs onto, you've got to add state taxes onto that before you even start. That's why these headlines are quite dangerous.
That's sort of really 23%-24%. That's just for the U.S. group. We'll have to wait to see how the legislation pans out, but we're certainly not looking at a tax rate of 20%, if that's what the question was. A 4% reduction would be a very large tax reduction for this group.
Well, I'm talking about the group rate of 28, right? That's the reference.
Yeah. So much. Yeah.
That obviously would be 800.
Yeah. No, a 4% tax reduction, I would be describing as a large reduction.
Okay. That's very clear. Thank you.
Listen, the truth, Gregor, again, just to go on record, the truth is we actually don't know. We've got lots of variance in the global world.
I know, presumably you've kind of done some scenario planning.
At the moment, it certainly doesn't feel negative, it's not large as I've just defined.
Okay. Thank you. Cheers.
Thanks, Gregor.
Thank you. Our next question comes from Phil Rosenberg from Bernstein. Please go ahead.
Hi. Morning, Mark and Mike. Just a couple left for me, please. One is a quick one on just clarification on your acquisition spend. You said $109 million in the first quarter, and your outlook, I think you gave at the full year, was $200 million-$300 million, again, for the full year 2018. How should we think about this? I know you mentioned it was lumpy, but it is already a very good start. Any change to your $200 million-$300 million outlook? The second question is just to try and understand a little bit better, U.S. organic growth of 8.3%, which was a nice surprise, given the hurricanes. Is there any way you could break that out a little bit?
I know there was 1% price within that. In terms of over-market growth and the, let's call it the market trend, is there any change to the market trend that you're seeing, either one way or the other? Thank you. Thanks.
Thanks, Phil. Acquisitions, 109. It was a good start. There's no change to my guidance. Purely, Phil, unfortunately, because my guidance will be wrong because M&A is unknown. The truth is, we don't know. We continue to work pipelines hard. There's no change to our activity this quarter from last quarter from the quarter before. Acquisitions just only become available when they become available, and then we do the value work to see whether that creates value for our shareholders. No reason to change the 200-300, but again, very difficult to make that call. The question on U.S. growth, was trying to get a little more granularity, I think, Phil, around markets. Again, I was talking to Paul Checketts earlier on the phone, and he asked a question which I think helps.
He said, "Has anything really changed from when we last updated the market in October?" The answer is no, actually. I think the markets remain good across all the sectors, and our outperformance across those four markets of resi, commercial, civils, and industrial, also remains in the same sort of area. Again, nothing's fundamentally changed from when we last spoke, and it feels pretty good in the U.S. still. Our market outperformance is still good.
Yeah. If you aggregate the markets, Phil, you're looking at 4%-5% market growth, and we're clearly outperforming that by 200-300 basis points, which is what we've been doing for quite a few years, actually. It's pretty straightforward. No massive change.
Okay. All right. Thanks very much.
Thank you.
Thanks, Phil.
Our next question comes from Howard Seymour from Numis. Please go ahead.
Thank you. Morning, gents.
Morning.
Morning, Howard.
Morning. It was a question on the U.K. on pricing, really. Also scope for pushing prices up next year. Just wondering if you see that in a more specific area than you've seen previously. Obviously, last year we saw quite a big shift across the piece, increasingly we've seen more selective price increases on commodity areas, whether that either helps or hinders your capability to retain the gross margin.
Yeah. No, thanks, Howard. I think the U.K., really, the pressure points remain in the plumbing and heating business. The infrastructure business has performed well and continues to perform well. The issues for us is that, frankly, our cost base needs to change in our plumbing and heating basis. That is as we have already set out. We set out the three-year journey. We sort of need to get on and do it. Again, as I said about the U.S. before, it isn't just all around price in this industry. It's around having the right products in the right place at the right time to give the customer the right service through the right channel that they want. For example, one of the good things that's happened in the U.K., we have rolled out electronic point of sale, electronic ordering. That's good.
We now need to make sure that we're converting our customers to using some of the technologies where they want to. Where they still want a sales guy, they can still have a sales guy. We do need to get our cost base correct in terms of the cost to serve, of getting the right products through the right channels to the right customers at the right price. We haven't done that. Whilst we have the plan, we've only done, as I say, somewhere between 25% and 30% of that work. We now need to get on with that very quickly.
Yeah. Okay. Thank you. Just a second question, really, is just on the acquisitions in Holland. Obviously not large, if we look at you acquiring into the U.S., Canada, something I think we'd expect, into Holland, maybe a small surprise. Is it an area that you'd consider to make further acquisitions into?
Well, firstly, just the scale, Holland, the Dutch acquisition was tiny. Very small indeed. Again, we scale it. What I would say, though, is any asset that we own, we'll invest appropriately in, whether that's in bucket 1, the organic growth, or in bucket 3, the M&A. Clearly in the U.K., it is unlikely you'll see us in that bucket 3. Our Dutch business is a good business. It was a very small acquisition in Holland that was appropriate at the time. You will see most of our capital deployed in North America. There's no change in that strategy, Howard. That's really just because the opportunities in the U.S. are plentiful. It is a good place for us to be deploying shareholder capital into North America.
Absolutely. Lovely. Thank you very much.
Thanks, Howard.
Thank you. Our next question comes from Manish Beria from Societe Generale. Please go ahead.
Yeah. Good morning, everyone.
Good morning, Manish.
So my-
Morning.
Yeah. I have two question. Yeah. The first question is about one of your peer, The Home Depot, who is saying they see very strong residential market until 2019-20. They see growth in 2018, 2019 and 2020. I just want to understand, do you share the same optimism? The second question is, I just want to understand what was the gross margin this quarter in the U.S. and also trying to understand, how should we think about in this inflationary environment? Is there some impact on your gross margin due to the pricing? Because I remember last time, in the deflationary environment, actually, you gained in the gross margin because the pricing was not perfect. Passing on the pricing was not perfect. Should we see some negative impact in the inflationary environment on the gross margin? Thank you.
Thanks, Manish. I'll let Mark talk about The Home Depot in a second. Gross margin, very little impact, in terms of inflationary environments, Manish. Mark, do you want to touch on just The Home Depot and optimisms?
Yes.
Capability.
Well, clearly, look, residential is the best market. It's the largest market for Ferguson. I think we feel good about it. Whether or not we feel good about it in three years time, feels like an awfully long time for us. We only have about five weeks of order visibility, remember. I think looking that far ahead, and I think that's at the limit of our visibility. Certainly as things stand, we feel pretty good about that market.
Manish, I think the U.S. feels pretty good. I think John summed it up at year-end, and it hasn't changed, which is there's no real hotspot. It's pretty widespread, both geographically and across our businesses. We always keep an eye on that because that generally is a good indicator whether things are overheating or getting a bit skewy. Generally, the U.S. feels pretty good.
Right. Just one more maybe. The Nordic sale that you will do, $1 billion of disposal money. Is it reasonable to expect this will return to the shareholder? The other way to look around is there any scenario when this money will not be returned to the shareholder? Maybe you'll get a very good acquisition or something like that?
Thanks, Manish. Yeah, I think I bored everybody with my four buckets. As and when the cash lands, we will consider it like any other balance sheet decision. There is no change in strategy just because we have money in the bank. We will go through our normal process looking at organic growth dividends, M&A, and then, if we have surplus cash, we will get that back to shareholders. There's no direct link between selling the Nordic and us changing our capital strategy, or our group strategy whatsoever.
Mm-hmm. Okay. Yeah. Thanks.
Thanks.
Our next question comes from Robert Eason from Goodbody. Please go ahead. Your line is open.
Hi. Good morning, everyone.
Morning, Robert.
Just a few questions from myself. You talk about a three-year journey in the U.K. that you announced last September, and then in the opening of the conference call, you kind of emphasized that you have to pick up the pace in terms of the cost reduction and your kind of 25%-30% through that process. How should we view that three-year journey, in terms of the acceleration of it? That's my first question. My second question is just around your e-commerce platforms in the U.S. and how they've performed, given all the chitchat about Amazon encroaching on the building materials area. Just a bit of color there. Forgive me for a technical question.
How should we think about lease accounting and the degree with which the visuals of Ferguson's balance sheet will look post all the leases coming on the balance sheet and just kind of maybe a few benchmarks on that. How should we view when that comes on, the one, two times net debt to EBITDA kind of comfort level that you talk about? What should we be thinking in the kind of the lease accounting world, which is we're going to have in whatever it is, 12 months time?
Thanks, Robert. On the U.K., I think when I talk about accelerate the pace and execution, that's really building on John's comments from the year-end, which is we're one year into a three-year journey. I think it is quite natural for myself and John to be frustrated with that pace of change. We are therefore spending more time with the team to make sure that we are delivering in what is a big transformation program. The team have done a good job, but making sure we are really laser focused on those areas that will deliver the benefits as soon as possible. I think whilst there's no change to the three-year journey, we just need to make sure that we are really focused in the flat market with supplier increases, that we are getting what we can quickly.
I don't think you'll see significant delta, but clearly we want to build a better business for our customers and for our shareholders as soon as we possibly can. I think it is a continued focus on execution and delivery of that three-year plan. e-commerce platforms continue to perform well. Our B2C businesses, our Build.com, our Signature Hardware businesses had another good quarter with good growth rates, so no change there. The same when we talk about e-commerce, about B2B, again, continued progress and growth there. Again, very similar rates to those we quoted at year-end. We don't see any change there. What I would say on Amazon, whilst we haven't seen any changes with the Amazon, it's not just Amazon of course, everybody quotes Amazon. Any competitors we remain cognizant and very mindful of all of our competition, as I'm sure they do about us.
We did outline our current thinking around making sure that we are fit and ready to cope with any competitor. That's really around staying competitive on pricing, fulfilling the basic customer needs really well, making sure we understand actually what the customer's specific wants are and that we fulfill them. Also having the best cost base in the industry. Those are our four competitive areas that we will continue to push forward, whether that be an Amazon or anybody else, frankly. In terms of lease accounting, it is a technical question. It's probably a little early, Robert, to comment.
Okay.
We are still working lease accounting. We have some choices around lease accounting, as you know. We'll clearly come back and update. Of course, if I can say, it doesn't really change the real world.
Yeah.
It does change the presentation, I grant you. It doesn't really change covenants because covenants are based on the IFRS standard at the time you strike the covenants with the bank. It will change presentation as it will for all companies. We'll clearly update the market at the right time once we've made those choices, Robert. It's certainly on the radar.
Okay. Thank you.
Thanks.
Thank you. Our next question comes from Arnaud Lehmann from Bank of America. Please go ahead.
Thank you very much. Good morning, gentlemen. A couple left for me, please. Firstly, could I follow up on your comment around Build.com? Is there any way we could get a bit more granularity around the contributions or the $4 billion of sales in the first quarter? How much of that is Build.com? In terms of growth, what would the 8% would be if you exclude Build.com? That's my first question. My second question is around your reporting. Basically you have the U.S., that's 90% of profits, plus a couple of lines which are quite small or relatively small for U.K. and Canada. Are you considering splitting the U.S. line into blended branches or Build.com, Waterworks, et cetera, because it's starting to look like a one-line model for us.
Thanks, Arnaud. Yeah, no, in terms of quarterly reporting, we don't split into each of our businesses at all. We'll update the market, clearly, at half year in terms of more of the detail on that. I have said that the growth rates are pretty similar to last year. In terms of reporting, we'll continue to look at reporting. The half year and full year, of course, does split our businesses out into somewhat more detail, and we'll continue to look at that. At the moment, there's no planned changes to the reporting for this year.
Build's about 6% of overall-
Build's about 7%
overall sales, the net margins of that business are reasonably similar or comparable to the net margins of Ferguson overall.
Correct. Yeah.
Great. Thank you very much.
Thanks, Arnaud.
Okay.
We'll now take our next question from John Messenger from Redburn. Please go ahead.
Hi, Mike and Mark. Just two, if I could. One was, sorry to come back on the U.K. again, when obviously the 3.2 was all essentially price flat volume. I'm just looking at the quarterlies and the comps from last year. When we think of where we are now going into the second quarter, obviously last year you had a big swing, 3.4 negative to 3.1 positive. Was there anything anomalous last year in the second quarter, or is that kind of telling us, look, this 3.2 just delivered really was kind of a two-year cumulative flat, and actually with that in mind, you're maybe going to have a tougher second quarter? Is that part of the reasoning in terms of, look, we need to crack on and push harder on readjusting the cost base and the branch network?
Could you just remind us, Mike, what The overall cost of that program now is set to be, and how far through that are you, just to think of the exceptionals? The second one was just on the group's overall balance sheet structure and financing. I wonder, could you just give us a view on your philosophy as to the kind of facilities you want to operate with? That I was just looking, I think at the end of last year you had GBP 2.3 billion sterling of debt facilities in total, GBP 1.4 billion was undrawn. You obviously raised GBP 450 million here.
Do you look at the group and say, look, I want broadly one and a half times my EBITDA as my total facility number, to then obviously adjust around and just to consider, because obviously you've got quite cheap revolving debt in place already, adding this seven and nine-year money, just to understand the philosophy and the reasoning behind that, if I could, please.
Sure. Thanks, John. On the U.K., your analysis is correct. I am not expecting a great second quarter in the U.K. I think our half year performance will continue to be difficult. I don't think, though, anything's fundamentally changed. Again, we don't really quarter-on-quarter, is something that people on this phone call talk to about. In terms of running the business, the environment remains, as I say, a little soggy. We have the plan, there's no reason not to execute the plan as quickly as we can. I think that's what I'm really trying to say, we will get on with it. Yes, you're right. I'm not expecting a great half, and certainly if we get to the full year flattish in the U.K. this year, having executed the plan, we'll be in good shape for the year after.
As I say, we have a good business in the U.K. We just need to make sure it's the right size with the right service offering for our customers. In terms of the costs and benefits, Mark, do you want to touch on that?
We talked about last September, 80 branch closures and a distribution center and 800 job losses. As we said earlier, we're up to about 38 branches and 200 heads. We talked about $100 million of restructuring charges. We told you about, I think in FY 2018, a further $65 million exceptionals, and $50 of that will be in cash. We should be within our guidance. We're not expected to change that guidance.
Got you. Brilliant. Thanks. Just on the balance sheet.
Yeah, sorry. In terms of facilities, sorry, I forgot that question, John. Yeah, the refinancing that you see is really just good housekeeping. The U.S. private placement market is a good market for us to tap. You can see we tapped some good term debt there at good prices. That doesn't really change the weighted cost of debt for the group, which I always quote at around 4% all in. We have got some facilities rolling off, and that's why you just see us with new facilities coming on. In terms of the way I tend to think about it, we always try to hold, in terms of liquidity, about $650 million of headroom. Anything around that number we will hold as headroom facilities.
Got you. Brilliant. Thanks, Mike.
Thanks, John.
Thank you. Our next question comes from Emily Biddulph from JP Morgan. Please go ahead. Your line is open.
costs. The first one on labor price inflation. Am I right in thinking that wage increases are actually negotiated during the summer, and therefore that Q1's margin performance was already net of the 3%-4% wage increase you're talking about for the full year? My second question was just on ship hubs. You obviously pulled those out as being another incremental cost for this year, but can you remind us what the rollout rate of those is and whether it's materially different to last year? Thanks.
Just on the ship hubs, Emily, we're rolling out pretty slowly and often using existing facilities, but two to three a year. I think we've got three in the plan for this financial year. It will be absolutely incremental. In terms of the labor cost inflation, actually it's through the year, so there isn't a specific time of the year when wages are negotiated. It actually happens progressively in different parts of the business at different times.
A large part of our wage bill is hourly, Emily, Mark's dead right. Happens across there. If you're thinking of modeling them whether one quarter is different.
Yeah
weight, I wouldn't go there. I think it's pretty well spread across the piece.
Great. Thanks.
Thanks, Emily.
Thank you. Our
Any last questions?
Our last question comes from Mr. Paul Checketts from Barclays. Please go ahead.
Hi, everyone. It's just a short one. If we talk about the Canada and Central Europe division, how do you think the outlook is for the top line and flow through, generally speaking? To what degree has the growth been driven by oil and gas markets rebounding? Perhaps I'd be interested in your thoughts on what you think the sustainability of that would be. Thanks.
Thanks, Paul. I thought you'd been quiet. I was worried you weren't on the call at 1 stage. Paul, thanks for your question about Canada. Canada has recovered very nicely. I think as we look forward, the growth rates that we have created and seen in the first quarter, there's no reason to suggest why they wouldn't carry on. The recovery is relatively widespread. There has clearly been some good growth in the Alberta oil type areas, which has clearly helped. Some of that will undoubtedly be pent-up demand, but I think at the moment, when I get to Canada on the ground, it feels pretty good as well. Certainly our Canadian management team are doing a good job, in markets which feel pretty good.
I think that's pretty sustainable right now, Paul, but clearly we would like to see another one or two quarters of that come through and develop. I think we're in a good place in Canada.
Do you get good drop-through margins, flow-through margins on your work in Alberta as it comes back?
Yep.
Thanks.
Thanks, Paul.
Thank you. It appears there are no further questions at this time. Mr. Powell, I'd like to turn the conference back to you for any additional or closing remarks.
Okay. Well, listen, I just wanted to thank you all for your continued support, for your time on the call this morning, particularly our U.S. friends that are up very early. Thanks, all. Thanks for your support, look forward to updating you at the half year results at the end of March. Thanks very much.
This concludes today's call. Thank you for your participation. You may now disconnect.